Secret techniques people used to use ....

Secret technique people used to use…

Article published as on Sunday, 29th December, at 10:00 a.m. 

People are very closed about sharing trade secrets, taking advantage of every loophole, we’ll learn about such loopholes and trade secrets today…

 

This article covers some in-depth topics about the Indian stock market, including Demat and trading accounts, permutations and combinations, the history of multiple Demat accounts, buybacks, and strategies to maximize returns.

Take your time reading and you’ll find valuable insights! 

p.s. My mind was blown when researching for this topic….

A demat account can be opened with 3 joint holders

 

Did you know a demat account can be opened with 3 joint holders?
(1^st primary and 2 other optional joint holders = 3 total holders)
 
In older times when companies used to issue share certificates, besides the primary holder they gave the option to add 1^st joint account holder and also 2^nd joint account holder.
 
Now suppose I, Harsh visharia had bought the share certificate with 1^st joint holder as Sarvadnya Shetkar and 2^nd joint as Abhijit Karkera.

Now when I have to demat (dematerialize) them, I have to open a demat account with same patter of holding that is demat with primary holder as Harsh Visharia, 2^nd as Sarvadnya Shetkar and 3^rd and Abhijit karkera
 
Even If I paid all the money and I would be liable for taxes on profits and gains still I cannot demat my shares if my demat is in my name alone.

I have to open demat it that specific combination only then my request for demat would process further with the company and RTA.
 
Many people might know that demat with joint accounts can be opened, and multiple such demat can be opened with a single broker.

but only 1 trading account can be opened.

Trading account is for trading and demat is where shares are stored, so the same DP IP of your demat would appear in the register of shareholders in which ever company you hold shares in.

many new age brokers who onboard clients online, like upstox, Groww, Paytm money don’t provide joint account holder facility.
Zerodha provides this facility (linkhere)

 

Permutation & Combination

permutation shows the number of way of arranging a set of items where the order/sequence matters.

Combination is where the order does not matter.

 

Formula for permutation

 

Where ‘n’ is number of people, and ‘r’ is ways to arrange the people,
Here we know joint accounts with 1 person, 2 people and maximum 3 people is possible, thus value of r = 1, 2,3
 
Problem 1;
We have 1 person, so how many different permutations are possible in which demat account can be opened?
Substitute the values and you get only 1 individual account possible
 
Problem 2;
We have 2 people, so how many different permutations are possible in which demat account can be opened?
 
Substitute the values and you get 2 individual account possible with primary holder.
And do it again for 1^st and 2^nd holder, you get 2 again.
So a total of 4 accounts can be opened.
 
Example,
2 Single holder account
1^st holder: Harsh Visharia             2^nd holder: (blank)                          3^rd holder: (blank)
1^st holder: Sarvadnya Shetkar      2^nd holder: (blank)                           3^rd holder: (blank)
 
2 Joint account with 2 people
1^st holder: Harsh Visharia;            2^nd holder: Sarvadnya Shetkar     3^rd holder: (blank)
1^st holder: Sarvadnya Shetkar;     2^nd holder: Harsh Visharia            3^rd holder: (blank)
 
 
So we got a total of 4 accounts with 2 unique PAN’s
 
Problem 3;
We have 3 people, so how many different permutations are possible in which demat account can be opened?
 
Substitute the values and you get 3 individual account possible with primary holder.
And do it again for 1^st and 2^nd holder, you get 6 accounts
Do it again for 1^st, 2^nd and 3^rd holder, you get 6 accounts
 
Example,
3 Single holder account
1^st holder: Harsh Visharia             2^nd holder: (blank)                          3^rd holder: (blank)
1^st holder: Sarvadnya Shetkar      2^nd holder: (blank)                           3^rd holder: (blank)
1^st holder: Abhijit Karkera             2^nd holder: (blank)                           3^rd holder: (blank)
 
6 Joint account with 2 people
1^st holder: Harsh Visharia;            2^nd holder: Sarvadnya Shetkar     3^rd holder: (blank)
1^st holder: Harsh Visharia;            2^nd holder: Abhijit karkera            3^rd holder: (blank)
1^st holder: Sarvadnya Shetkar;     2^nd holder: Harsh Visharia            3^rd holder: (blank)
1^st holder: Sarvadnya Shetkar;     2^nd holder: Abhijit karkera            3^rd holder: (blank)
1^st holder: Abhijit Karkera;            2^nd holder: Sarvadnya Shetkar     3^rd holder: (blank)
1^st holder: Abhijit Karkera;            2^nd holder: Harsh Visharia            3^rd holder: (blank)
 
6 joint account with 3 people
1^st holder: Harsh Visharia;            2^nd holder: Sarvadnya Shetkar     3^rd holder: Abhijit karkera
1^st holder: Harsh Visharia;            2^nd holder: Abhijit karkera            3^rd holder: Sarvadnya Shetkar
1^st holder: Sarvadnya Shetkar;     2^nd holder: Harsh Visharia            3^rd holder: Abhijit karkera
1^st holder: Sarvadnya Shetkar;     2^nd holder: Abhijit karkera            3^rd holder: Harsh Visharia
1^st holder: Abhijit Karkera;            2^nd holder: Sarvadnya Shetkar     3^rd holder: Harsh Visharia
1^st holder: Abhijit Karkera;            2^nd holder: Harsh Visharia            3^rd holder: Sarvadnya Shetkar
 
So we get a total of 15 accounts with just 3 Unique PAN’s
 
I could go on and on like this…
Here is the table for your reference, 

 

Unique PAN's	Single account	Joint: 2 holders	Joint: 3 holders	Total
1	1	0	0	1
2	2	2	0	4
3	3	6	6	15
4	4	12	24	40
5	5	20	60	85
5	5	20	60	85
6	6	30	120	156
7	7	42	210	259
8	8	56	336	400
9	9	72	504	585
10	10	90	720	820
11	11	110	990	1111

 

You may use the online permutation calculator (linkhere)

 

Now here with 3 Unique PAN you can open 15 demat with different permutation at a single broker.
With different brokers we can open even more…
 
And they would all count as separate shareholders in the register of shareholder under different DP ID.
 
But the trick to be used doesn’t need different brokers, only one would suffice. We shall know why very soon…
 

           15% Quota for small shareholders in buybacks

In 2012 Sebi bought this 15% quota for small shareholders, who’s market value of security is less than 2 lacs on the record date.
 
Meaning if the buyback is through tender route (not stock exchange route)
Then of the total amount reserved for buyback, 15% shall be reserved for such small shareholder wherein market value of shares held is less than 2 lacs.
 

Execution

For example,
So, a person who has more capital, but also wants to reap benefits of higher entitlement ratio (reserved for small shareholders) can in effect open 15 accounts in permutation with 3 people
 
So for example a person with 30 lacs worth of stock instead of applying under general category would choose this trick and increase the entitlement in buyback, thus maximizing returns in the buyback.
 
This strategy is for HNI’s, they may even go for permutation with 4, 5, 6 or even 11 people.
Permutation of 11 people provides capital deployment capability of 22.22 crores.
And all of the gains (Short or long term) would be TAX FREE

           How is this possible? Is this even legal?

 

Yes, this is possible.
Demat accounts with same PAN would be clubbed to ascertain the value of securities.
However, the SEQUENCE of PAN in demat matters.
 
Note that in above case in every demat the sequence is unique. And we use single broker (no multiple brokers, which would create same PAN demats which would then be clubbed)
 
SEBI regulations on buyback (Refer Page 16 of 50)
https://www.sebi.gov.in/legal/regulations/may-2024/securities-and-exchange-board-of-india-buy-back-of-securities-regulations-2018-last-amended-on-may-17-2024-_68104.html
 
Note:
People may think this is unfair, however here the investor gets rewarded, but also takes the risk.
Not every buyback is profitable as the stock price can fall causing loss on remaining shares.
Thus, I feel the reward here is justified for the efforts and risk taken by the investors.
 
However, due to recent changes this strategy is now obsolete, lets understand how
 

Chronology

Now let’s understand the chronology, and sequence how often and frequent rules related to dividends and buybacks were changed …
 
Before 31/03/2018
 
Companies used to declare dividends, which was tax free in the hands of the investors
Total dividend above ₹10 lacs attracted additional 10% tax rate (link)
 
Here companies had to pay DDT of 15% with Surcharge and cess
https://www.livemint.com/money/personal-finance/dividend-distribution-tax-explained-in-5-points-this-tax-could-be-changed-11572341550007.html
 
 
Gross Amount embarked for dividend                        = 100
Dividend distribution tax                                            = 100*15% = 15
Net amount investors get in hand                               = 100 – 15 = 85
Surcharge of 12%                                                       = 15*12% = 1.80
Education cess of 4%                                                 = (15+ 1.80) *4% = ₹0.672
Total tax (DDT + surcharge + cess)                           = 15 + 1.80 + 0.672 = 17.472
 
Effective tax rate                                                        = 17.472/85 = 20.56%
 
There was no similar buyback tax that listed companies had to pay, however unlisted companies had to pay tax at 20% plus cess.
 
Investors only had to pay STCG, if they incurred any, LTCG was 0 anyways.
Many IT companies did buyback during this period.
 
 
In 2018’s budget by Arun Jaitley
They introduced (rather re-introduced) LTCG (long term capital gains) tax of 10% on equities
 
In 2019’s interim budget by Piyush Goyal, no major change

In 2019’s July Budget by Nirmala Sitaraman
They extended buyback tax to listed companies (to eliminate tax avoidance)
Meaning now the company pays buyback tax just like DDT on (Buyback price – issue price of share)
This is when companies started to slow down on buyback…
 
In 2020’s Budget by Nirmala Sitaraman
They abolished the DDT that companies had to pay, but now the dividends are taxable in the hands of investors.
Some companies rushed declared huge one-time dividends during February and March of 2020.
(Link here)
 
With this new rule it was better to not hold stocks, and instead invest through mutual funds as the dividends paid by companies was not taxable on mutual fund level, and for investors choosing growth option in mutual funds, the only incidence of taxation was STCG & LTCG.
 
In 2024’s July budget by Nirmala Sitaraman
STCG increased from 10% to 12.5%; LTCG increased from 10% to 12.5% w.e.f 23^rd July
 
For buyback now the 20% additional tax that companies used to pay is no longer the case.
But the income generated by tendering shares for buyback will be 100% treated as dividend income
And 100% of the cost price of the shares could be claimed as capital loss (Either short or term)
 
This was w.e.f from 1^st October 2024.
This saves a lot of money for companies, but also discourages investors from participating in buyback if they are into higher tax bracket.
 
(link showing example how this works)
Government did this to plug the tax arbitrage between the dividends and buybacks.
HOWEVER,… MUTUAL FUNDS can still tender shares and still pay 0% on the income.
 
Due to this VERY big change the strategy of opening multiple demat accounts and tendering shares for buyback is now obsolete.
 
(Also, w.e.f 1^st April 2025 only tender offer route will prevail, SEBI also plans to bring in more changes to buyback rules going forward)
 

Case of Roopalben Panchal

The case of Roopalben Panchal led to various updates and changes in requirement for opening of bank and demat accounts.
 
The story is takes place between 2003 to 200

Roopalben Panchal was wife of a sub-broker and also ran a photo studio
At that time the requirement for opening a savings bank account was simply details of account holder and their photo.
She had ample of photos samples from the studio she ran… they created hundreds and hundreds of fictitious bank accounts using the fake names, surnames along with the photos they had.
 
Using these bank accounts, they opened demat accounts in the investors name.
Also the requirement was PAN was not necessary for application within value of 50,000.
So, they multiple application from same person with different demat account was also possible.
 
Using this method, they applied in various IPO’s and cornered shares meant for retail investors and then transferred to single account (using off market transfer) and sold the shares on listing there by making huge gains.
 
After investigation done by SEBI they gains made by them were taken in form of penalties and distributed to applicants of these IPO’s
 
Thanks to such above cases, we now have Aadhar linked to PAN and mobile number and are mandatorily needed to open bank and demat accounts
 
(Link for the case of Roopalben Panchal)
 

Quite interesting methods and techniques people employ; it’s fun learning and researching about them.

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